Is there still a role for UGMA accounts for college savings?
John, it is great that you are thinking about retirement. Do you qualify for ROTH IRA? If so, we continue to think that the ROTH is the best vehicle the government has given us. I recommend adding as much to your work retirement as possible, at least up to the limit of matching by your company. It is also important not to neglect a savings/emergency account. Once that account is suffeciently funded, ROTH if you qualify.
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The disadvantage of UGMA's are that they are a asset of the child when applying for student aid. The other issue is that they are owned by the child when he/she reaches 18. Martha
Ah ha! Here's the question from John, everyone:
When we think about our retirement savings goal - or "the number" - how do taxes factor into that? For example, if our goal is $5 million and all of our retirement assets are in Roth IRAs and Roth 401ks, we save $5 million and that's it. But say our assets are split 50/50 among Roth accounts and traditional IRAs/401ks. Do we need to save 25% more in our traditional accounts to account for the taxes we will pay upon withdrawal?
Yes, I believe there is. Grandparents and parents often want to gift stock for college, UGMAs are a good vehicle for that. They are more flexible and you can manage tax consequences with index fund investments. They are not as good tax wise as 529, but have their place for certain families. As Martha said, there are dissadvantages as well, but we have found different strategies to handle them. By the time the child is 15 or so, you have a pretty good idea how they may handle the money set aside for college. If you fear that they buy a tatoo parlor or something like that, you can transfer the proceeds to an UGMA 529 plan, which could be used for another family member.
Gifting to an UGMA to reduce estate tax liability may be strategically beneficial and less costly than setting up a traditional Trust but there are other less complex mechanisms to achieve the same purpose. But for the sole purpose of funding for college, 529 Plans are a better way to go.
John, that's a hard question to answer because we don't know what tax rates will look like in the future. You are on the correct path though as far as anticipating the tax implications of withdrawing from tax-deferred funds. Also, be aware that there are definite benefits of being tax diversified -- having both tax-free and tax-deferred accounts (you should likely also have some assets in a taxable account that qualify for capital gains treatment as well). In years when tax rates are high, you could explore taking withdrawals form the tax-free Roth accounts. Conversely, in years when tax rates are low, that would be a good time to withdraw from the tax-deferred traditional IRA or 401k accounts.
Yes John, we subtract the tax liability (IOU to uncle Sam) before calculating our client's capacity. You need to know your marginal tax rate when doing this.
Savingforcollege.com has a great article on transferring UGMA to 529
I might add that an UGMA is not kind to federal financial college aid.
Hi Brenda! Thanks for joining. Your question is next on deck.
Hi John, assuming all goes well, I don't see an issue with that strategy. Of course they should be aware that once they gift the funds to you, they are yours to do with as you please -- nothing will require you to contribute the funds to the 529 plans.
John, you are fortunate to have relative contribute to your childrens' education funds. This should free some of your own resources to continue to contribute to your retirement funds.
Here's one from Brenda coming in:
If my memory serves me correctly, grandparents as the owner of the 529 plan count more heavily in financial aid than parent established on. They can contribute to the funds you already have established. If the do not gift to you outside of this, you could certainly have them send the funds to you, then it s a matter of trust that you will put it in the 529. We have clients doing it both ways.
You can bring they to your local bank or you may work thoug TreasuryDirect .gov. Martha
You can cash them in at your bank. Did you keep serial numbers on the lost ones? The treasury department has a list of all savings bonds issued in your social security number lots of info on these at treasurydirect.gov
Brenda, you can't open a 401k for your son. Your son's ability to open a 401k account would depend on whether his employer offers a plan. You could potentially help your older son contribute to a Roth IRA account (which is probably the best option for him), but he would need to have income that he earned during the year in order for you to do this. Assuming he has income, be aware that you can't contribute more to a Roth IRA account than what he makes during the course of the year. Of course, Roth IRA contributions are currently limited to $5,500 per year for people under age 50.
Brenda, a question: Is you son working at a company that offers a 401(k) and you want to supplement his income so that he can open one?
Brenda, your may earn a little higher return by using on-line bank such as Everbank. Your son cannot open a 401(K) unless he is self -employed. If he is employed, his employer probably offers a plan. Martha
Sorry Brenda, if your son doesn't have income, he can't contribute to a tax-advantaged plan. However, you can still open a taxable investment account and make contributions to that.
Well then, you can't establish a 401(k) and if he doesn't have income, you can't do a ROTH IRA.
Brenda, an IRA or ROTH can be opened at any age however, your son would have to have taxable compensation. The IRS defines compensation as: "Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts received for providing personal services. It also includes commissions, self-employment income, nontaxable combat pay, military differential pay, and taxable alimony and separate maintenance payments."
Brenda, according to a recent Fidelity study, people should have 1x their salary saved by age 35, and 2x their salary by age 40.
Brenda, I wouldn't worry about how much money you should have in your 401(k) at this point. You need to focus on what you can control and that means finding the vocation that will allow your most productive natural talents to shine.
Except in the case of major natural disasters, Savings Bonds can’t be redeemed for one year after purchase. In addition, there is a three-month interest penalty for redemption before five years.
If you go to TreasuryDirect.gov you may enter you holdings and safe the file. This will provide the rate earning by the bond, the current value, when it reaches maturity (the face amount) and fill maturity when the interest payments stop. Martha
Brenda, if your son ends up working part-time during college, just remember that he may be eligible to contribute to a ROTH and he would need to file an income tax return in order to contribute.
Brenda, you're not alone! But it's never too late to start.
Hi Dickerson, thanks for popping in! We'll get to your question in just a second.